CWC Energy Services Corp. Announces Fourth Quarter and Year End 2016 Operational and Financial Results

CALGARY, Feb. 28, 2017 /CNW/ - (TSXV: CWC) CWC Energy Services Corp. ("CWC" or the "Company") announces the release of its operational and financial results for the three and twelve months ended December 31, 2016. The Financial Statements and Management Discussion and Analysis ("MD&A") for the three and twelve months ended December 31, 2016 are filed on SEDAR at www.sedar.com.

Highlights for the Three Months Ended December 31, 2016

• In Q4 2016 the Company experienced increased demand for drilling and well services largely attributable to higher commodity prices. The Q4 2016 average crude price, as measured by WTI, of US$49.04/bbl was a 9% increase over Q3 2016 average price of US$44.85/bbl and 17% higher than US$41.94/bbl in Q4 2015. Natural gas prices, as measured by AECO, increased 33% from an average of $2.22/GJ in Q3 2016 to $2.95/GJ in Q4 2016 (Q4 2015: $2.35/GJ).
  
  
• CWC's drilling rig utilization of 31% in Q4 2016 (Q4 2015: 23%) exceeded the Canadian Association of Oilwell Drilling Contractors ("CAODC") industry average of 24%. Q4 2016 drilling rig operating days were affected by unusually warm weather and wet operating conditions in October and November 2016, which negatively impacted our ability to access well sites and move drilling rig equipment to customer locations. CWC achieved 257 drilling rig operating days in Q4 2016 and estimates an additional 134 drilling rig operating days were lost due to the warm and wet weather conditions. Nevertheless, increased activity levels in Q4 2016 compared to Q4 2015 reflects the increasing optimism of our E&P customers as a result of the OPEC agreement on production cuts and the resultant increase in global crude oil prices subsequent to their November 30, 2016 meeting.
  
  
• CWC's service rig utilization of 45% in Q4 2016 (Q4 2015: 36%) with 27,091 operating hours was 29% higher than the 21,008 operating hours in Q4 2015. Q4 2016 service rig operating hours were also affected by the unusually warm weather and wet operating conditions in October and November 2016, which limited the ability to move service rig equipment to customer locations. CWC estimates an additional 4,200 service rig operating hours were lost due to the wet operating conditions. Despite the unfavourable weather, CWC's Q4 2016 service rig operating hours and utilization was its highest since Q4 2014 (28,644 hours and 45% respectively) suggesting that CWC's activity with its E&P customers have returned to pre-downturn activity levels.
  
  
• CWC's coil tubing utilization of 32% in Q4 2016 (Q4 2015: 23%) from 2,349 operating hours was 41% higher than the 1,665 operating hours in Q4 2015. The increased activity level is a direct result of a greater demand by our E&P customers to service their steam assisted gravity drainage ("SAGD") wells.
  
  
• Revenue of $21.0 million, an increase of $2.2 million (12%) compared to $18.8 million in Q4 2015. The increase from Q4 2015 is a result of increased year-over-year activity levels offset by lower year-over-year pricing consistent with prior 2016 quarters.
  
  
• EBITDAS ⁽¹⁾ of $2.9 million, an increase of $0.6 million (26%) compared to $2.3 million in Q4 2015. Increased EBITDAS is a direct result of increased year-over-year activity levels and lower variable and fixed costs from the Company's 2015 and 2016 cash savings initiatives offset by lower year-over-year pricing in both the Contract Drilling and Production Services business segments.
  
  
• Net loss of $1.7 million, a decrease of $5.0 million (-75%) compared to a net loss of $6.7 million in Q4 2015. The year-over-year reduction in net loss is primarily due to an impairment of goodwill and assets of $6.9 million in Q4 2015 with no similar impairment in Q4 2016, an increase in Q4 2016 EBITDAS, decreases in finance costs and deferred income tax recovery, all partially offset by an increase in non-cash stock based compensation.

Highlights for the Year Ended December 31, 2016

• CWC's drilling rig utilization of 26% in 2016 (2015: 31%) exceeded the CAODC industry average of 17%. The lower activity level in 2016 (814 drilling rig operating days) compared to 2015 (1,028 drilling rig operating days) is a result of persistent uncertainty throughout most of 2016 on our E&P customers as to when crude oil prices would recover from their low levels due to the ongoing oversupply of crude oil production globally. This uncertainty resulted in lower demand by our E&P customers in 2016 compared to 2015 for our Contract Drilling services.
  
  
• CWC's service rig utilization was 40% in 2016 (2015: 29%). The Company's continuing increase in market share since Q4 2015 can be attributed to its modern fleet of 74 service rigs, exceptional sales and operational management, and experienced rig crews performing work safely and efficiently. Customer appreciation and acceptance of our outstanding service and safety performance and high quality and well maintained equipment are strong and has been a key differentiating factor for CWC.
  
  
• CWC's coil tubing utilization was 30% in 2016 (2015: 31%). The Company's slightly lower year-over-year utilization was affected by lost operating hours in Q2 2016 as a result of our E&P customers having to shut down operations due to the Fort McMurray wildfires in May 2016. This temporary shutdown resulted in pent up demand for our coil tubing services in Q3 and Q4 2016 resulting in increased operating hours for those quarters compared to Q3 and Q4 2015.
  
  
• Revenue of $73.1 million, a decrease of $8.2 million (-10%) compared to $81.3 million in 2015. The decline from the previous year is predominately due to lower drilling rig activity and pricing combined with lower service rig and coil tubing pricing charged to our E&P customers, which was partially offset by a significant increase in service rig activity.
  
  
• EBITDAS⁽¹⁾ of $8.2 million, a decrease of $3.8 million (-32%) compared to $12.0 million in 2015. Decreased EBITDAS is a direct result of lower drilling rig activity and lower drilling rig, service rig and coil tubing pricing charged to E&P customers, which was partially offset by a significant increase in service rig activity and lower variable and fixed costs from the Company's cash savings initiatives which began in 2015 for which the benefits continued to be realized in 2016.
  
  
• Net loss of $7.5 million, a decrease of $21.6 million (-74%) compared to a net loss of $29.1 million in 2015. The year-over-year reduction in net loss is due to an impairment of goodwill and assets of $24.2 million in 2015 with no similar impairment in 2016, an increase in deferred income tax recovery, a decrease in depreciation and amortization expense and non-cash stock based compensation partially offset by lower 2016 EBITDAS and an increase in finance costs.
  
  
• On April 25, 2016, the Company extended its credit agreement with its banking syndicate to include, among other things, the following terms:
  • the maturity date of the credit facilities were extended to July 31, 2018;
  • the credit facilities were voluntarily reduced from $75.0 million to $65.0 million with the ability to increase the credit facilities by an additional $60.0 million through an accordion feature, subject to approval by the banking syndicate;
  • amendments to the quarterly financial covenants for Consolidated Debt to Consolidated EBITDA ratio; and
  • the inclusion of an equity cure provision which allows the Company to apply the proceeds of equity offerings in the calculation of Consolidated EBITDA towards the Consolidated Debt to Consolidated EBITDA ratio until March 31, 2018, subject to certain conditions as follows:
    • an equity cure may be utilized in no more than two quarters during such period;
    • an equity cure may not be utilized in consecutive quarters; and
    • an equity cure utilized in any quarter is not to exceed the greater of 50% of total Consolidated EBITDA over the prior twelve month period or $15.0 million.

• On June 2, 2016, CWC announced the closing of its equity rights offering and the issuance of an additional 97.5 million common shares. The equity rights offering was oversubscribed and generated $14.6 million in gross proceeds. $7.0 million of these proceeds was used to reduce long-term debt in July 2016 and the remainder of the $7.6 million is held in a segregated bank account and has been deducted from long-term debt at December 31, 2016.
  
  
• The Company renewed its Normal Course Issuer Bid ("NCIB") effective June 8, 2016 to purchase from time to time, as it considers advisable, up to 19,512,200 of issued and outstanding common shares through the facilities of the TSX Venture Exchange ("TSXV") or other recognized marketplaces. The price that the Company will pay for any common share under the NCIB will be the prevailing market price on the TSXV at the time of such purchase. To December 31, 2016, no common shares were purchased under the NCIB. The NCIB expires on June 7, 2017 unless renewed.

Financial and Operational Highlights

Operational Overview

Contract Drilling

CWC Ironhand Drilling, the Company's Contract Drilling segment, has a fleet of nine telescopic double drilling rigs with depth ratings from 3,200 to 5,000 metres, eight of nine rigs have top drives, two have pad rig walking systems. The drilling rig fleet has an average age of seven years. All of the drilling rigs are well suited for the most active depths for horizontal drilling in the WCSB, including the Montney, Cardium, Duvernay and other deep basin horizons. Given the downturn in the industry CWC chose to park one of its drilling rigs at the beginning of 2016 and focus its sales and operational efforts on the remaining eight drilling rigs. CWC found a customer for its one inactive drilling rig in Q3 2016 and as such all nine drilling rigs are now active.

Contract Drilling revenue of $5.3 million for Q4 2016 (Q4 2015: $4.8 million) was achieved with a utilization rate of 31% (Q4 2015: 23%), compared to the CAODC industry average of 24%. Q4 2016 drilling rig operating days were affected by unusually warm weather and wet operating conditions in October and November 2016, which negatively impacted our ability to access well sites and move drilling rig equipment to customer locations. CWC achieved 257 drilling rig operating days in Q4 2016 and estimates an additional 134 drilling rig operating days were lost due to the warm and wet weather conditions. Q4 2016 revenue was 11% higher compared to Q4 2015 as increased activity more than offset the impact of reduced pricing.

Contract Drilling revenue of $15.9 million for the year ended December 31, 2016 (2015: $27.8 million) was achieved with a utilization rate of 26%, compared to the CAODC industry average of 17%. 2016 revenue was 43% lower than 2015 as persistent uncertainty throughout most of 2016 on our E&P customers as to when crude oil and natural gas prices would recover from their low prices kept drilling activity at historically low levels. According to the CAODC, the total Canadian drilling industry operating days was 42,307 in 2016, a 35% reduction from 2015 operating days of 64,580. In comparison, CWC's 21% reduction from 1,028 operating days in 2015 to 814 operating days in 2016 outperformed the CAODC industry average and is attributable to the Company having the most modern, relevant and well maintained drilling rigs as well as a reputation for safe and efficient operations, exceptional management and experienced drilling rig crews. 

Production Services

CWC is the second largest service rig provider in the WCSB, based on our modern fleet of 74 service rigs as at December 31, 2016 which consists of 41 single, 27 double, and 6 slant rigs. CWC's fleet is amongst the newest in the WCSB and provides services which include completions, maintenance, workovers and abandonments with depth ratings from 1,500 to 5,000 metres. Given the current downturn in the industry, CWC chose to park nine of its service rigs at the beginning of 2016 and focus its sales and operational efforts on the remaining 65 service rigs. In Q3 and Q4 2016, the Company found customers for two of its inactive service rigs and as such have reactivated these two service rigs for a total active fleet of 67 service rigs at December 31, 2016. 

CWC's Class I, II and III coil tubing units have depth ratings from 1,500 to 4,000 metres. As at December 31, 2016, the Company's fleet of nine coil tubing units consists of five Class I, three Class II and one Class III coil tubing units. In light of competitive challenges for CWC's Class III coil tubing unit, the Company has chosen to focus its sales and operational efforts on its eight Class I and II coil tubing units which are better suited at servicing SAGD wells, which are shallower in depth and more appropriate for these coil tubing operations. In Q4 2016 the company acquired an additional Class I coil tubing unit which is expected to be put into service in Q1 2017.

Production Services revenue was $15.7 million in Q4 2016, up $1.7 million (12%) compared to $14.0 million in Q4 2015, as the impact of increased activity for the Company's service rigs and coil tubing units were partially offset by lower revenue per hour. Revenue per hour has continued to decline since Q4 2014 as reduced industry activity resulted in intense competition and aggressive pricing of services. The increase in operating hours for both service rigs and coil tubing units in Q4 2016 from Q3 2016 coincides with seasonal increased demand from our customers combined with an improved commodity price environment.

CWC's service rig utilization of 45% in Q4 2016 (Q4 2015: 36%) with 27,091 operating hours was 29% higher than the 21,008 operating hours in Q4 2015. Q4 2016 service rig operating hours were also affected by the unusual warm weather and wet operating conditions in October and November 2016, which limited the ability to move service rig equipment to customer locations. CWC estimates an additional 4,200 service rig operating hours were lost due to the wet operating conditions. Despite the unfavourable weather, CWC's Q4 2016 service rig operating hours and utilization was its highest since Q4 2014 (28,644 hours and 45% respectively) suggesting that CWC's activity with its E&P customers have returned to pre-downturn activity levels.

CWC's coil tubing utilization of 32% in Q4 2016 (Q4 2015: 23%) from 2,349 operating hours was 41% higher than the 1,665 operating hours in Q4 2015. The increased activity level is a direct result of a greater demand by our E&P customers to service their SAGD wells. Coil tubing's average hourly rate of $507 per hour in Q4 2016, a 23% decline from $657 per hour in Q4 2015 is due to a higher activity mix from its lower priced Class I units working on SAGD wells compared to the deeper Class II units and overall pricing pressure from our E&P customers compared to a year ago.

For the year ended December 31, 2016 Production Services revenue of $57.2 million was 7% higher than the $53.5 million achieved in 2015 as CWC outperformed the CAODC service rig industry and incrementally increased its operating hours in each quarter by increasing market share, which was partially offset by lower average revenue per hour. CWC's 95,208 service rig operating hours in 2016, a 39% increase to the 68,315 operating hours in 2015 is in sharp contrast to the total reported CAODC service rig industry decline of 7% in operating hours from 2015 to 2016. The Company's Q4 2016 estimated market share of 10% was earned with 7% of the CAODC active industry rig fleet and is 3% higher than the 7% market share in Q4 2015. The Company's operating hours were higher than any other CAODC registered service rig contractor in 2016. CWC's strong market share is a result of: (i) a focus on production work; (ii) an increase in market share with a select number of senior E&P customers; (iii) an aggressive pricing strategy initiated in Q4 2015; and (iv) a service rig fleet, amongst the newest in the WCSB, which stands out in an industry characterized by ageing equipment and infrastructure.

CWC's coil tubing utilization was 30% for the year ended December 31, 2016 (2015: 31%). The Company's slightly lower year-over-year utilization was affected by lost operating hours in Q2 2016 as a result of our E&P customers having to shut down operations due to the Fort McMurray wildfires in May 2016. This temporary shutdown resulted in pent up demand for our coil tubing services in Q3 and Q4 2016 resulting in increased operating hours for those quarters compared to Q3 and Q4 2015.

Capital Expenditures

Capital expenditures in 2016 of $2.7 million are $6.5 million (-71%) lower than $9.2 million in 2015 and primarily consist of recertification costs, leasehold improvements, new drill pipe, a new coil tubing unit and vehicles. This compares to 2015 capital expenditures related to costs associated with completion of slant service rigs #505 and #506, the purchase of new drill pipe, the addition of a pad rig walking system to drilling rig #3, and costs incurred prior to the decision to delay the upgrade of drilling rig #2 and build of new drilling rig #10.

A 2017 capital expenditure budget of $5.9 million was approved by the Board of Directors on December 6, 2016 comprised of $5.4 million of maintenance and infrastructure capital related to recertifications, additions and upgrades to field equipment for the drilling rigs, service rigs and coil tubing divisions as well as for information technology and $0.5 million of growth capital.

Outlook

Crude oil, as represented by WTI, averaged US$49.04/bbl in Q4 2016, and increase of 9% over Q3 2016 average price of US$44.85/bbl and 17% higher than US$41.94/bbl in Q4 2015. Natural gas prices, as represented by AECO, averaged $2.95/GJ, 33% higher than the Q3 2016 average of $2.22/GJ. For the year ended December 31, 2016, approximately 73% of revenue is from work on crude oil wells, 25% was from natural gas wells, and 2% was other. Further, approximately 26% was related to drilling and completions work, 63% from maintenance and workovers on producing wells and 11% from abandonments. Higher crude oil prices in the US$50/bbl to US$55/bbl range as a result of the OPEC agreement on November 30, 2016 to reduce oil production supply has resulted in increased activity levels in the WCSB to start 2017. Indeed on January 30, 2017 the Petroleum Services Association of Canada ("PSAC") increased its 2017 Canadian Drilling Activity Forecast by 975 wells or 23% to 5,150 wells from the original November 2016 forecast. CWC continues to experience strong utilizations in 2017 with all of our business lines, and currently has nine of nine drilling rigs (100%) contracted, 54 of 67 service rigs (81%) and eight of nine coil tubing units (89%) working. These Q1 2017 activity levels have returned to pre-downturn levels last achieved in October 2014. As demand for services increase across the industry, it has become apparent that the deterioration in the skilled labour force due to the lack of work and layoffs that have occurred over the last two years has become a limiting factor as to how quickly oilfield service companies will be able to service their E&P customers. As one of the most active drilling and service rig contractors in the WCSB, CWC has been able to retain experienced, high quality rig crews. However, we are finding it increasingly difficult to find and hire qualified field employees to staff the next incremental drilling rig, service rig or coil tubing unit to meet increasing customer demand. The Company anticipates that if this tight labour market stays in the industry for several quarters, it should lead to increased pricing for our services and improved operating and cash flow margins in future quarters.

CWC's 2015 and 2016 proactive focus on targeted reductions to variable and fixed costs, headcount and wages, suspension of dividends and strategic and prudent capital expenditures has contributed to the Company being able to achieve positive EBITDAS and cash flow throughout 2016 despite competitive pricing pressures. CWC's financial stability was significantly enhanced in Q2 2016 with its rights offering and extension of its credit facilities with its banking syndicate. These operational and financial measures will result in significant and sustainable benefits to the Company in 2017 as we strive to improve EBITDAS and cash flow margins and strive to return to profitability.

While CWC continues to maintain focus on its operational and financial performance, it is also mindful of taking advantage of opportunities as they arise. Management continues to actively evaluate strategic opportunities and pursue those it believes will fundamentally position CWC well for the future with the overriding criteria of being able to create long-term shareholder value.

About CWC Energy Services Corp.

CWC Energy Services Corp. is a premier contract drilling and well servicing company operating in the WCSB with a complementary suite of oilfield services including drilling rigs, service rigs and coil tubing units. The Company's corporate office is located in Calgary, Alberta, with operational locations in Nisku, Grande Prairie, Slave Lake, Red Deer, Drayton Valley, Lloydminster, Provost and Brooks, Alberta. The Company's shares trade on the TSX Venture Exchange under the symbol "CWC".

READER ADVISORY - Neither TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.

This news release contains certain forward-looking information and statements within the meaning of applicable Canadian securities legislation. Certain statements contained in this news release including most of those contained in the section titled "Outlook" and including statements which may contain such words as "anticipate", "could", "continue", "should", "seek", "may", "intend", "likely", "plan", "estimate", "believe", "expect", "will", "objective", "ongoing", "project" and similar expressions are intended to identify forward-looking information or statements. In particular, this news release contains forward-looking statements including management's assessment of future plans and operations, planned levels of capital expenditures, expectations as to activity levels, expectations on the sustainability of future cash flow and earnings and the ability to pay dividends, expectations with respect to crude oil and natural gas prices, activity levels in various areas, continuing focus on cost saving measures, expectations regarding the level and type of drilling and production and related drilling and well services activity in the WCSB, expectations regarding entering into long term drilling contracts and expanding its customer base, and expectations regarding the business, operations and revenue of the Company in addition to general economic conditions. Although the Company believes that the expectations and assumptions on which such forward-looking information and statements are based are reasonable, undue reliance should not be placed on the forward-looking information and statements because the Company can give no assurances that they will prove to be correct. Since forward-looking information and statements address future events and conditions, by their very nature they involve inherent risks and uncertainties. Actual results could differ materially from those currently anticipated due to a number of factors and risks. These include, but are not limited to, the risks associated with the drilling and oilfield services sector (ie. demand, pricing and terms for oilfield drilling and services; current and expected oil and gas prices; exploration and development costs and delays; reserves discovery and decline rates; pipeline and transportation capacity; weather, health, safety and environmental risks), integration of acquisitions, competition, and uncertainties resulting from potential delays or changes in plans with respect to acquisitions, development projects or capital expenditures and changes in legislation, including but not limited to tax laws, royalties and environmental regulations, stock market volatility and the inability to access sufficient capital from external and internal sources and the inability to pay dividends. Accordingly, readers should not place undue reliance on the forward-looking statements. Readers are cautioned that the foregoing list of factors is not exhaustive. Additional information on these and other factors that could affect the Company's financial results are included in reports on file with applicable securities regulatory authorities and may be accessed through SEDAR at www.sedar.com. The forward-looking information and statements contained in this news release are made as of the date hereof and the Company undertakes no obligation to update publicly or revise any forward-looking information or statements, whether as a result of new information, future events or otherwise, unless so required by applicable securities laws. Any forward-looking statements made previously may be inaccurate now.

Reconciliation of Non-IFRS Measures

SOURCE CWC Energy Services Corp.

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